|SThe remainder of this section of the
presentation will demonstrate how the crude oil price increase was the
primary driving force behind the rapidly increasing differentials in 2004. But before we inspect the data, this chart
was drawn to illustrate the mechanism of how crude price affects product
values, which in turn affect light-heavy crude price differentials.
|SAs crude oil markets tighten, price
increases and the prices for light products increase as much if not more.
|SResidual fuel prices, however, do not
increase as much as crude oil prices, since this fuel competes with other
boiler fuels. If the prices of these substitute fuels are not rising as
fast as crude oil prices, then residual fuel prices will not increase as much
as crude oil prices.
|SAs light products rise relative to crude
oil and residual fuel declines relative to crude oil, the value of crude oils
that yield higher fractions of light products will increase relative to
heavier crude oils that yield more residual fuel and less light product
volumes. Thus, light crude oil
prices increase more than heavy crude oil prices and the light-heavy crude
price difference grows.